New SEC Probe Scrutinizes 'Political Intelligence'

The case in question deals with a Washington, DC political intelligence firm which alerted clients of a pending government decision favoring health insurers. Jacob Frenkel, Schulman Rogers partner, discusses what constitutes insider trading.

A Securities and Exchange Commission investigation into stock trading after a leak involving a government decision is a "very gray area," former SEC attorney Jacob Frenkel told CNBC on Thursday.

The Washington Post reports that subpoenas have been issued to a firm and individuals in connection with an alert last month of a federal funding decision. The alert was made before the stock market close, sending major health companies, including Humana and Aetna, soaring. The decision was made after the end of the trading day.

The Post said the investigation is a sign of growing government oversight of the "political intelligence" industry, in which firms harvest information about government to advise clients, including hedge funds.

"This is really about expert networks inside the beltway," Frenkel, a partner at Shulman Rogers, said in a "Squawk Box" interview.

The Post cited several people familiar with the investigation as saying the SEC subpoenaed an analyst at Washington-based investment firm Height Securities and a health care lobbyist who advised Height on legislative issues.

"You have people who troll the halls of Capitol Hill, troll the halls of the agencies ... and are providing that information, that service to a client," Frenkel said. "These companies also sell this information to hedge funds, to professionals who trade on Wall Street."

The Post said the case arises out of an April 1 alert to clients by Height Securities just before the closing bell on Wall Street that the government would soon make a favorable decision for private health insurers who participate in a Medicare program. The official government announcement came after the stock market closed.

All parties involved deny any wrongdoing.

Andrew Parmentier, Height Securities' managing director, said in a statement to the newspaper that the firm's alert "was based on careful and close analysis of the facts, and was solid, sound research in accordance with applicable laws and regulations."

The question in this case is whether insider trading occurred, Frenkel said. "It does if ... there's actual material nonpublic information. But we're talking about the halls of Capitol Hill where rumors abound, discussions and concepts are always in play. I think this is a very gray area."

Last year, the Stop Trading on Congressional Knowledge (STOCK) Act was passed with great fanfare. It was designed to prevent lawmakers, their staffs and other government officials from using insider knowledge about policy-making to profit from stock trades and other investments.

The financial disclosures of these officials were supposed to be posted in an online database open to the public. But recently, a modification scrapped those transparency requirements for the staffers, leaving them in place only for members of Congress, congressional candidates, and the president and vice president.

"The insider trading rules ... are adequate," Frenkel said. "I don't think there needs to be regulation in this area."